Comerica Reports Third Quarter Net Income of $59 Million

DALLAS, Oct. 20 /PRNewswire-FirstCall/ -- Comerica Incorporated (NYSE: CMA) today reported third quarter 2010 net income of $59 million, compared to $70 million for the second quarter 2010. Third quarter 2010 included a total provision for credit losses of $116 million, compared to $126 million for the second quarter 2010.

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"In this sluggish and still uncertain economic environment, our customers have remained understandably cautious.  This is reflected in the weak loan demand and continued strong core deposit levels," said Ralph W. Babb Jr., chairman and chief executive officer.  "Our solid capital and liquidity position enabled us to fully redeem our trust preferred securities on October 1, which will reduce interest expense.  This uniquely positions us as the only bank in our peer group to have redeemed TARP and eliminated trust preferred securities.

"Our third quarter financial results reflected the continued improvement in credit quality and careful control of expenses.  Our skill-based, relationship-driven strategy and our prudent, conservative approach to banking continued to serve us well."

Third Quarter 2010 Highlights Compared to Second Quarter 2010

• Credit quality continued to improve.  Net credit-related charge-offs decreased $14 million to $132 million and the provision for credit losses, which includes both the provision for loan losses and the provision for credit losses on lending-related commitments, decreased $10 million to $116 million. Watch list loans - generally consistent with regulatory defined special mention, substandard and doubtful (nonaccrual) loans – declined $480 million to $6.2 billion.
• The pace of decline in loans continued to slow in the third quarter 2010.  Average loans decreased $570 million, compared to declines of $641 million and $1.4 billion in the second and first quarters of 2010, respectively.  About one-half of the third quarter 2010 decrease in average loans was in the Commercial Real Estate business line. Average loans increased in the third quarter 2010 in the Mortgage Banker Finance, National Dealer Services and Energy Lending business lines.
• Average deposit levels remained strong in the third quarter 2010, decreasing only one percent from the second quarter 2010.  Growth in business deposits was offset by reduced Personal and Private Banking deposits.
• Net interest income decreased $18 million to $404 million for the third quarter 2010, compared to $422 million for the second quarter 2010. Average earning assets decreased $1.6 billion in the third quarter 2010, compared to the second quarter 2010, and the net interest margin of 3.23 percent decreased five basis points, from 3.28 percent in the second quarter 2010.  
• Expenses remained well controlled in the third quarter 2010.  Noninterest expenses increased one percent from second quarter 2010 to third quarter 2010.  Full-time equivalent staff decreased by approximately 300 employees, or three percent, from September 30, 2009.
• Capital ratios remained strong. The tangible common equity ratio increased 28 basis points to 10.39 percent at September 30, 2010 and the estimated Tier 1 common ratio increased 16 basis points, to 9.97 percent at September 30, 2010, from June 30, 2010.  The estimated Tier 1 capital ratio was 9.97 percent at September 30, 2010, compared to 10.64 percent at June 30, 2010, reflecting the redemption of trust preferred securities.

Net Interest Income and Net Interest Margin

• The $18 million decrease in net interest income in the third quarter 2010, when compared to second quarter 2010, resulted primarily from decreases in earning assets and the net interest margin.
• Average earning assets decreased $1.6 billion, including decreases of $736 million in average Federal Reserve Bank deposits, $570 million in average loans and $356 million in average investment securities. The decrease in average loans reflected decreases in the Middle Market, Commercial Real Estate and Global Corporate Banking business lines, partially offset by increases in the Mortgage Banker Finance, National Dealer Services and Energy Lending business lines.
• The net interest margin of 3.23 percent decreased five basis points, compared to second quarter 2010.  The third quarter 2010 was negatively impacted by a reduction in deferred loan fees recognized, compared to the second quarter 2010, resulting from a higher rate of loan prepayments in the first half of 2010, and accelerated prepayments on higher-yielding mortgage-backed investment securities in the third quarter 2010.  A reduction in excess liquidity partially offset these decreases. The net interest margin was reduced by approximately 19 and 23 basis points in the third and second quarters of 2010, respectively, from excess liquidity, which was represented by $3.0 billion of average balances deposited with the Federal Reserve Bank in the third quarter 2010, compared to $3.7 billion of average balances in the second quarter 2010.  
• Third quarter 2010 average core deposits decreased $142 million compared to second quarter 2010.

Noninterest Income

Noninterest income was $186 million for the third quarter 2010, compared to $194 million for the second quarter 2010.  The $8 million decrease resulted primarily from decreases of $6 million in customer derivative income (included in "other noninterest income") and $2 million in foreign exchange income, partially offset by a $3 million increase in investment banking income (included in "other noninterest income").  

Noninterest Expenses

Noninterest expenses were $402 million for the third quarter 2010, compared to $397 million for the second quarter 2010. The $5 million increase in noninterest expenses in the third quarter 2010, compared to the second quarter 2010, was primarily due to increases in salaries expense ($8 million) and employee benefits expense ($2 million), partially offset by a decrease in the provision for credit losses on lending-related commitments ($6 million).  The increase in salaries expense reflected the impact of one additional day in the third quarter 2010 and included an increase in share-based compensation expense of $6 million as a result of third quarter 2010 stock grants.  Full-time equivalent staff decreased by approximately 300 employees, or three percent, from September 30, 2009.

Credit Quality

"The continued improvement in credit quality is reflected by the decline in net charge-offs for the fifth consecutive quarter, as well as the $10 million decline in the provision for credit losses compared to the second quarter," Babb said.  "The increase in inflows to nonaccrual loans primarily reflected commercial real estate, which we believe will continue to exhibit variability with a downward trend.  Overall, credit migration has actually improved, as evidenced by the $480 million decline in the watch list, which is our best early indicator of future credit quality.  Our early recognition of credit issues and our ability to quickly and proactively work through them remains one of our key strengths."

• Net credit-related charge-offs decreased $14 million to $132 million in the third quarter 2010, from $146 million in the second quarter 2010. The decrease in net credit-related charge-offs resulted primarily from a $39 million decrease in the Middle Market business line in the third quarter 2010, partially offset by a $24 million increase in the Commercial Real Estate business line, primarily in the Western and Midwest markets.
• Watch list loans declined $480 million to $6.2 billion from June 30, 2010 to September 30, 2010.
• The provision for credit losses decreased $10 million, primarily due to declines in the Middle Market,  Energy Lending and Entertainment Lending business lines, partially offset by increases in the Private Banking and Commercial Real Estate business lines.
• During the third quarter 2010, $294 million of loan relationships greater than $2 million were transferred to nonaccrual status, an increase of $95 million from the second quarter 2010, primarily due to a $100 million increase in transfers from the Commercial Real Estate business line.  Of the transfers of loan relationships greater than $2 million to nonaccrual in the third quarter 2010, $132 million were from the Commercial Real Estate business line, primarily in the Western and Florida markets, $91 million were from the Middle Market business line, primarily in the Midwest market, and $28 million were from Energy Lending in the Texas market.
• Nonperforming assets increased $97 million to $1.3 billion, or 3.24 percent of total loans and foreclosed property, at September 30, 2010.  
• Nonaccrual loans were charged down 45 percent as of both September 30, 2010 and June 30, 2010, compared to 41 percent one year ago.
• Foreclosed property increased $27 million to $120 million at September 30, 2010, from $93 million at June 30, 2010.
• Loans past due 90 days or more and still accruing were $104 million at September 30, 2010, a decrease of $11 million compared to June 30, 2010.
• The allowance for loan losses to total loans ratio was 2.38 percent at both September 30, 2010 and June 30, 2010.

Balance Sheet and Capital Management

Total assets and common shareholders' equity were $55.0 billion and $5.9 billion, respectively, at September 30, 2010, compared to $55.9 billion and $5.8 billion, respectively, at June 30, 2010. There were approximately 176 million common shares outstanding at September 30, 2010.  

On October 1, 2010 Comerica fully redeemed $500 million of trust preferred securities.  Subsequent to the redemption, no additional trust preferred securities remained outstanding.  As previously announced, Comerica will recognize a one-time, pre-tax charge of approximately $5 million in the fourth quarter 2010, reflecting accelerated accretion of the remaining trust preferred original issuance discount.  The $500 million of trust preferred securities outstanding at September 30, 2010 were excluded from Tier 1 and total capital in the computation of estimated risk-based capital ratios as of September 30, 2010.

Comerica's tangible common equity ratio was 10.39 percent at September 30, 2010, an increase of 28 basis points from June 30, 2010. The estimated Tier 1 common ratio increased 16 basis points, to 9.97 percent at September 30, 2010, from June 30, 2010.  The estimated Tier 1 capital ratio was 9.97 percent at September 30, 2010, compared to 10.64 percent at June 30, 2010.  The decrease in the Tier 1 capital ratio reflected the redemption of the trust preferred securities, which accounted for 83 basis points in the June 30, 2010 Tier 1 capital ratio.

Fourth Quarter 2010 Outlook

For the fourth quarter 2010, management expects:

• Average earning assets of approximately $48 billion in the fourth quarter 2010, largely reflecting a decline in average excess liquidity from $3.0 billion in the third quarter 2010 to approximately $1 billion in the fourth quarter 2010. Excess liquidity is expected to decline primarily due to debt maturities and the redemption of the trust preferred securities.
• An average net interest margin between 3.30 percent and 3.35 percent primarily based on a decline in excess liquidity.
• Fourth quarter 2010 net credit-related charge-offs similar to third quarter 2010. The provision for credit losses is expected to be below net credit-related charge-offs.
• A low single-digit decline in noninterest income compared to the third quarter 2010.  Market-related fees are expected to be lower as customers remain cautious in a sluggish and still uncertain economic environment.
• A low single-digit increase in noninterest expenses compared to the third quarter 2010.  Included in the outlook is an estimated $5 million negative impact reflecting accelerated accretion of the remaining original issuance discount on the redemption of trust preferred securities.

Business Segments

Comerica's continuing operations are strategically aligned into three major business segments: the Business Bank, the Retail Bank, and Wealth & Institutional Management.  The Finance Division also is included as a segment. The financial results below are based on the internal business unit structure of the Corporation and methodologies in effect at September 30, 2010 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses third quarter 2010 results compared to second quarter 2010.

The following table presents net income (loss) by business segment.

Business Bank

• Average loans decreased $413 million, reflecting declines in all major markets. The decrease in average loans reflected decreases in Commercial Real Estate, Middle Market and Global Corporate Banking, partially offset by increases in Mortgage Banker Finance, National Dealer Services and Energy Lending. The decline in loans continued to slow in the third quarter 2010.
• Average deposits increased $197 million, primarily due to increases in Middle Market, Energy Lending and the Financial Services Division, partially offset by a decline in Global Corporate Banking.
• The net interest margin of 4.45 percent decreased 18 basis points, due in part to a reduction in deferred loan fees recognized in the third quarter 2010 and a change in the deposit mix, as balances moved from lower-cost transaction accounts to higher-cost money market accounts.
• The provision for loan losses decreased $26 million, primarily due to a decrease in Middle Market.
• Noninterest income decreased $9 million, primarily due to decreases in foreign exchange income and customer derivative income.
• Noninterest expenses decreased $2 million, primarily due to a decrease in the provision for credit losses on lending-related commitments, partially offset by an increase in allocated corporate overhead expenses.

Retail Bank

• Average loans decreased $132 million, reflecting declines across all markets and business lines.
• Average deposits increased $42 million, primarily due to increases in noninterest-bearing and money market deposits, partially offset by a decline in customer certificates of deposit.
• The provision for loan losses increased $4 million, reflecting increases in Personal Banking and Small Business Banking.
• Noninterest expenses increased $5 million, primarily due to increases in net occupancy expense and allocated corporate overhead expenses.

Wealth and Institutional Management

• Average loans decreased $16 million.
• Average deposits decreased $318 million, primarily due to a decline in transaction deposit accounts.
• The net interest margin of 3.42 percent decreased 31 basis points, primarily due to a decrease in lower-cost transaction deposit accounts.
• The provision for loan losses increased $18 million primarily due to an increase in reserves for investor-owned real estate in the Western market.

Geographic Market Segments

Comerica also provides market segment results for four primary geographic markets: Midwest, Western, Texas and Florida.  In addition to the four primary geographic markets, Other Markets and International are also reported as market segments.  The financial results below are based on methodologies in effect at September 30, 2010 and are presented on a fully taxable equivalent (FTE) basis. The accompanying narrative addresses third quarter 2010 results compared to second quarter 2010.

The following table presents net income (loss) by market segment.

Midwest Market

• Average loans decreased $316 million, with declines in nearly all business lines, partially offset by an increase in National Dealer Services.  The decline in loans continued to slow in the third quarter 2010.
• Average deposits decreased $211 million, primarily due to decreases in Global Corporate Banking and Personal Banking, partially offset by increases in the Financial Services Division, Small Business Banking and Middle Market.
• The net interest margin of 4.45 percent decreased 21 basis points, due in part to a reduction in deferred loan fees recognized in the third quarter 2010 and a change in the deposit mix.
• The provision for loan losses increased $4 million, primarily due to increases in Middle Market, Private Banking and Personal Banking, partially offset by decreases in Commercial Real Estate and Small Business Banking.
• Noninterest income increased $2 million, primarily due to an increase in investment banking fees.
• Noninterest expenses increased $5 million, primarily due to an increase in allocated corporate overhead expense.

Western Market

• Average loans decreased $236 million, with declines in nearly all business lines, partially offset by an increase in National Dealer Services.
• Average deposits decreased $158 million, primarily due to decreases in Private Banking and Technology and Life Sciences, partially offset by increases in Middle Market, Small Business Banking and Global Corporate Banking.
• The net interest margin of 4.96 percent declined 17 basis points, due in part to a reduction in deferred loan fees recognized in the third quarter 2010, a decrease in average deposits and a change in the deposit mix.
• The provision for loan losses increased $24 million, primarily due to increases in Private Banking and Commercial Real Estate.
• Noninterest expenses decreased $3 million, primarily due to a decrease in the provision for credit losses on lending-related commitments, partially offset by an increase in allocated corporate overhead expense.

Texas Market

• Average loans decreased $71 million, primarily due to decreases in Commercial Real Estate, Middle Market and Technology and Life Sciences, partially offset by an increase in Energy Lending.
• Average deposits increased $127 million, primarily due to increases in Energy Lending and Small Business Banking, partially offset by decreases in Global Corporate Banking and Private Banking.
• The net interest margin of 4.87 percent decreased 18 basis points, due in part to a reduction in deferred loan fees recognized in the third quarter 2010 and a change in the deposit mix.
• The provision for loan losses increased $18 million, primarily due to an increase in Commercial Real Estate.
• Noninterest expenses decreased $4 million primarily due to a decrease in the provision for credit losses on lending-related commitments, partially offset by an increase in allocated corporate overhead expenses.

Florida Market

• Average loans decreased $26 million, primarily due to decreases in Middle Market and Commercial Real Estate, partially offset by an increase in Global Corporate Banking.
• Average deposits decreased $40 million, primarily due to decreases in Global Corporate Banking and the Financial Services Division.
• The net interest margin of 2.61 percent decreased 33 basis points, due in part to a reduction in deferred loan fees recognized in the third quarter 2010 and a change in the deposit mix.
• The provision for loan losses decreased $7 million primarily due to decreases in Private Banking and Commercial Real Estate.

Conference Call and Webcast

Comerica will host a conference call to review third quarter 2010 financial results at 7 a.m. CT Wednesday, October 20, 2010. Interested parties may access the conference call by calling (800) 309-2262 or (706) 679-5261 (event ID No. 11806039). The call and supplemental financial information can also be accessed on the Internet at www.comerica.com.  A replay will be available approximately two hours following the conference call through October 31, 2010. The conference call replay can be accessed by calling (800) 642-1687 or (706) 645-9291 (event ID No. 11806039). A replay of the Webcast can also be accessed via Comerica's "Investor Relations" page at www.comerica.com.

Comerica Incorporated is a financial services company headquartered in Dallas, Texas, and strategically aligned by three major business segments: the Business Bank, the Retail Bank, and Wealth & Institutional Management. Comerica focuses on relationships and helping people and businesses be successful. In addition to Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico.

This press release contains both financial measures based on accounting principles generally accepted in the United States (GAAP) and non-GAAP based financial measures, which are used where management believes it to be helpful in understanding Comerica's results of operations or financial position.  Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconcilement to the comparable GAAP financial measure, can be found in this press release.  These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward-looking Statements

Any statements in this news release that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "believes," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "outcome," "continue," "remain," "maintain," "trend," "objective" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to Comerica or its management, are intended to identify forward-looking statements. These forward-looking statements are predicated on the beliefs and assumptions of Comerica's management based on information known to Comerica's management as of the date of this news release and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Comerica's management for future or past operations, products or services, and forecasts of Comerica's revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, estimates of credit trends and global stability. Such statements reflect the view of Comerica's management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Comerica's actual results could differ materially from those discussed.  Factors that could cause or contribute to such differences are further economic downturns, changes in the pace of an economic recovery and related changes in employment levels, changes in real estate values, fuel prices, energy costs or other events that could affect customer income levels or general economic conditions, the effects of recently enacted legislation, actions taken by or proposed by the U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Texas Department of Banking and the Federal Deposit Insurance Corporation, legislation or regulations enacted in the future, and the impact and expiration of such legislation and regulatory actions, the effects of war and other armed conflicts or acts of terrorism, the effects of natural disasters including, but not limited to, hurricanes, tornadoes, earthquakes, fires, droughts  and floods, the disruption of private or public utilities, the implementation of Comerica's strategies and business models, management's ability to maintain and expand customer relationships, changes in customer borrowing, repayment, investment and deposit practices, management's ability to retain key officers and employees, changes in the accounting treatment of any particular item, the impact of regulatory examinations, declines or other changes in the businesses or industries in which Comerica has a concentration of loans, including, but not limited to, the automotive production industry and the real estate business lines, the anticipated performance of any new banking centers, the entry of new competitors in Comerica's markets, changes in the level of fee income, changes in applicable laws and regulations, including those concerning taxes, banking, securities and insurance, changes in trade, monetary and fiscal policies, including the interest rate policies of the Board of Governors of the Federal Reserve System, fluctuations in inflation or interest rates, changes in general economic, political or industry conditions and related credit and market conditions, the interdependence of financial service companies and adverse conditions in the stock market. Comerica cautions that the foregoing list of factors is not exclusive. For discussion of factors that may cause actual results to differ from expectations, please refer to our filings with the Securities and Exchange Commission. In particular, please refer to "Item 1A. Risk Factors" beginning on page 11 of Comerica's Annual Report on Form 10-K for the year ended December 31, 2009, "Item 1A. Risk Factors" beginning on page 67 of Comerica's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and "Item 1A. Risk Factors" beginning on page 71 of Comerica's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. Forward-looking statements speak only as of the date they are made. Comerica does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this news release or in any documents, Comerica claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

SOURCE Comerica Incorporated